China’s State Sector Strikes Back

The best defense is said to be a good offense. That seems to be the strategy at Sasac, the government arm that looks after state assets, just as reform of state industry appears to be around the corner.

Reuters

An employee works at a steel factory in Jiaxing, Zhejiang province.

The State-owned Assets Supervision and Administration Commission has been actively promoting a media campaign that praises its stewardship of a stable of state enterprises, often referred to as yang qi (central government companies). The campaign acknowledges that reform lies ahead but advises the public – and the Communist Party leadership – that Sasac has made some solid achievements in its 10 years of supervising a portfolio of government companies.

For Sasac and its allies among the big state enterprises, the key theme is that the state sector – known for inefficiency and red ink in the past — has been transformed and streamlined into a competitive force that China can be proud of. And of course, some of the credit goes to you know who.

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Their argument is that national champions have chalked up major accomplishments such as successfully exploiting the nation’s valuable natural resources or producing the Shenzhou spacecraft and the Jiaolong deep sea diving vessel – contributing hefty profits to the nation along the way.

“There is a new state sector,” proclaimed the People’s Daily, where the first series of laudatory articles appeared last month. “These achievements are the source of unparalleled pride of the Chinese people – and they bear a common label – ‘made by China’s State-owned Industry.’”

The ruling party’s flagship newspaper wasn’t alone in heaping praise on state industry. The official news agency Xinhua has joined the cheerleading, while China Central Television has kicked off a series as well on the “New State Sector.”

China’s leaders have made it clear that reform of state industry is one of their goals this year in an effort to rebalance the economy and sustain growth over the longer term.

The successes and failures of the state sector are a crucial part of the debate on just how much reform is needed.

Critics of the state sector charge that big state companies are benefiting from favors and monopolistic practices or wasting resources and crowding out the private sector. Their defenders see them as delivering important services, often in a highly competitive fashion, and being vital to the health of the economy and even national defense.

Thrown into the intensifying debate is the future role of Sasac.

Zhou Yongliang, chairman of consulting firm GFortune, said that Sasac has been hoping to guide the discussion in a direction it likes.

“Sasac has been looking up [to the leadership] and looking down [to the general population],” said Mr. Zhou, referring to Sasac’s interest in shaping views of decision makers as well as the public at large.

Mr. Zhou, formerly an executive in the state sector and now chairman of a firm that counts state companies among its clients, said a detailed plan for an overhaul of the sector is likely to be unveiled after a key meeting of Communist Party leaders in the fall.

Once the dust settles, Sasac will likely have fewer companies to look after. Moreover, there could be a separate arrangement for companies where there is competition – such as in real estate – and where the state operates a utility for public benefit, like electric power.

Whatever the formula agreed on, there will be changes.

“We’re at the point of no return – we must have reforms,” said Mr. Zhou. “If there is no progress on this it will damage the reputation of the party leaders.”

What happens to Sasac is actually only a small part of the picture. While Beijing frequently justifies the state’s grip on key companies that form the “commanding heights” of the economy – like energy, power, steel, telecoms and shipbuilding – there are many more at the local level that don’t appear to fit that description.

“China has about 114,000 state-owned enterprises, mostly controlled at the local government level, and mostly not very strategic,” wrote Andrew Batson, research director at GK Dragonomics, in a report issued late last year.

“State firms do have a continuing and large presence in obviously non-strategic sectors — like restaurants — that is increasingly difficult to justify in a market-driven economy,” he said. “The odds are rising that the state sector will face more downsizing and consolidation after several years of stasis.”

The state sector can brag about some valid achievements. As the People’s Daily said, the 117 companies supervised by Sasac last year (that has since fallen to 115) recorded combined profits of 1.3 trillion yuan ($209 billion).

But the ruling party’s flagship newspaper didn’t waste a lot of ink writing about the red ink at China Ocean Shipping, whose listed China Cosco Holdings subsidiary announced another big loss last year — and has scrambled to sell assets in a bid to avoid an embarrassing delisting of its shares from the Shanghai stock exchange.

Meanwhile, the China Business News apparently didn’t get the official memo on talking up state industry’s proudest moments. It recently ran a front page story on the mounting short-term debt in the struggling steel sector, which includes some listed heavyweights owned by the central government, such as Baosteel, Anshan Iron & Steel and Wuhan Iron & Steel.

There were more than a few hints on the source of the media campaign. Sasac’s own website prominently displayed Xinhua stories and a number of CCTV’s special reports on the successes of big state companies.

Asked whether Sasac played a role in the media reports, an official of the state supervisory agency said that help was given to CCTV on “some” of the programs in the series.

The media campaign didn’t quite convince everyone, however.

“State companies are an interest group and this is their pushback against reforms,” said Jon Chen, head of Anbound Consulting and a frequent commentator on reform of the state sector.

Mr. Chen contends that big state companies still have a place in the economy, but their shortcomings are being carefully deleted from the public picture.

“I support a role for state companies but this [publicity campaign] is an attempt to whitewash their record.”

He suggests that state companies can be counted on to look out for their own interests but not much else. “Who really can represent the public interest?” he asks, before answering his own question: “Certainly not state-owned enterprises and certainly not the People’s Daily.”

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